There is always a mass of numbers and data to observe when a company reports earnings, certainly for a company with many moving parts like United Parcel Service (UPS 0.18%). That said, I think there's one key metric that investors should watch very closely when UPS releases its fourth-quarter earnings on Jan. 30.
The relationship between revenue per piece and cost per piece
Zeroing in on UPS' core U.S. domestic package segment, investors already know that delivery volumes are improving again, with a 6.5% increase in average daily volume on a year-over-year basis in the third quarter. However, a lot of the volume increase comes from relatively lower revenue per-piece deliveries, which management describes as "short zone, lightweight e-commerce packages" flowing into its network.
As such, the transportation company needs to improve the relationship between revenue per piece, or RPP (up is good), and cost per piece, or CPP (down is good). As you can see below, RPP declined in the third quarter, but CPP was down more, leading to a positive spread.
Digging into the fourth-quarter commentary on the last earnings call, management said CPP would increase in the fourth quarter, but the spread would remain positive, implying that RPP would also increase.
|
UPS U.S. Domestic Package Segment |
First Quarter 2024 |
Second Quarter 2024 |
Third Quarter 2024 |
Fourth Quarter 2024 Guidance |
|---|---|---|---|---|
|
Revenue per piece |
(0.3)% |
(2.6)% |
(2.2)% |
"We expect the combination of both volume and revenue per piece growth"* |
|
Adjusted cost per piece |
4.1% |
2.5% |
(4.1)% |
"probably be up about 1% per piece"* |
|
Spread |
(440) bp |
(510) bp |
190 bp |
"we'll maintain a positive spread"* |
Data source: UPS presentations. Bp is basis points, where 100bp=1%, *CFO Brian Dykes on the third-quarter earnings call.
What it means to investors
With delivery volumes set to improve, UPS can demonstrate an ability to expand margins by improving the RPP/CPP spread. That's a key part of the bullish case for the stock, and investors should monitor this relationship closely.
